Crown Crafts, Inc. (CRWS) Earnings Call Transcript

Thanks for that introduction, operator, and I appreciate all of you being here today. Usually our CFO, Claire Spencer, would be with me, but she has just had a baby in her family, so today I will speak on her behalf. In the second quarter of our fiscal year, Crown Crafts kept moving forward on internal efforts designed to boost profitability now and in future years. You can see that in our gross profit margin, which grew by more than 300 basis points compared with the prior year quarter, even on an adjusted basis, and in our improved bottom line. Earnings per share rose slightly versus the past year, and operating cash flow across the first six months of our fiscal year has stayed strong. Put differently, although demand conditions are still soft, we are carrying out our own improvement initiatives so we are ready for what comes next and can take advantage of stronger sales when conditions normalize. Sales came in below the year-ago quarter, but that mostly reflects the fact that the year-earlier September quarter gained from the rebound after the initial tariff reaction and the related inventory problems in the June quarter of fiscal 2026. As for today's demand environment, consumers clearly feel somewhat hesitant amid uncertainty over high interest rates, gas prices, affordability broadly, and geopolitical events. Our sales got a lift from the recent relaunch of the iconic fashion doll line from the Manhattan Toy brand. Groovy Girls keeps posting strong growth in Canada, and we look forward to updating you as this retro-inspired line picks up more traction. I also want to go deeper today on our margins, cash flow, and balance sheet strength, which directly reflect our emphasis on profitability. As I said, gross margin improved considerably over the past year, and I should note that we also managed to reduce marketing and administrative expenses thanks to our ongoing sharp focus on efficiencies and cost controls. Consequently, we not only reported stronger net income this quarter, but our operating cash flow year to date has risen to $11 million, partly because of tariff refunds. We have put this solid cash flow to work strengthening our balance sheet further, and our long-term debt is now substantially lower. As a result we are paying far less interest expense, and we can also keep paying a dividend to our highly valued shareholders, with the stock currently yielding approximately 5%. With that, I will move now to the traditional CFO portion of our prepared remarks, walking you through our financial results in more detail before we open it up for questions. So as I said, we saw better profitability and solid cash flow from operations in the second quarter, even with revenues down year over year, and part of that decline came from how strong things were a year earlier in Q2 of 2026, when sales rebounded following the first round of tariffs and the inventory shifts tied to them that had hit the first quarter of the prior year. Net sales for the second quarter came to $19 million, versus $23.7 million in the second fiscal quarter of 2026. Gross margin for the quarter rose to 32%, or 30.9% once you adjust for tariff refunds and severance expense, which is well above the 27.7% we posted in the year-ago quarter, and that reflects our move toward a mix with higher margins as well as our strategic pricing efforts. Our continued emphasis on efficiency also let us successfully bring down marketing and administrative expenses, which totaled $4.5 million. That compares favorably with $4.7 million in the same quarter last year. As I noted, strong cash flow, partly tied to tariff refunds, has let us cut debt sharply over the last year, and I will get into that shortly. With less debt, stronger cash balances, and interest linked to tariff refunds, we swung to positive net interest income of $72,000 for the most recent quarter, versus net interest expense of almost $300,000 a year before. On bottom line results, GAAP net income for the quarter was $1.3 million, a slight increase over the past year, and GAAP earnings per share came in at $0.12, up from $0.11. Turning to the balance sheet, we finished September with total liquidity of $18.8 million, which includes cash and equivalents plus availability under our revolving line of credit. Total debt stood at $5.3 million as of September, a big improvement from $14.1 million since our fiscal year began this past March. This strong financial position is a source of strength as we keep executing our business plan, invest prudently in future growth opportunities, and pay a quarterly dividend to our valued shareholders. Going forward, the whole team stays focused on driving profitable growth for Crown Crafts. While our internal product development team pursues exciting ways to broaden our product offerings, we are also continuing to pursue efficiencies and monitor expenses closely so we can keep driving margin expansion, as you saw this quarter. More specifically, we are aiming for a greater mix of higher-margin products and, over time, intend to consolidate certain internal operations and consolidate warehouses, as you have heard me mention on earlier calls. All of these initiatives are on track as planned, and we look forward to sharing further updates over time. To sum up, in order to enhance long-term shareholder value at Crown Crafts, we are taking advantage of this stretch of softer consumer spending to grow our own profitability while also getting ready to capitalize on stronger demand trends down the road. This begins with internal development and covers growing our marketing programs, all the while using our brands along with our retail and licensing agreements with our valued partners. With that, operator, I would be glad to take questions if you would kindly open the lines.

Hi there, and thanks for taking my question. I've got a couple of things to ask. Am I coming through clearly? Sorry about that.

Yes.

Right, okay, that's helpful. Would you be able to give us a bit more detail? I get that your sales are lower, as you explained earlier, since you had an unusual quarter a year back. Excluding that, what portion of the decline came from your intentional choice to boost margin, and what portion came from the weakness? Perhaps you could also tell us how we should think about the Q4 guidance going forward. Will it always be down year-over-year as well, or do you have any visibility on that?

On the first couple of questions, I can give you an answer, but when it comes to looking ahead to the next few quarters, forward-looking information really isn't something we provide. Regarding the second quarter, without exact figures in front of me, roughly half of it, perhaps slightly more, came from the second quarter of last year being inflated because the first quarter of last year was below the prior year. The remainder will come from some programs we've already discussed over the last few quarters, such as a blanket program that we no longer have, along with some other items. Then there were certain programs, maybe not programs as such, but some products we decided to take off sale since they simply weren't profitable for us.

All right, that's quite useful. On the profit margin side, it's clearly good to see it lifted to 30.9% on a normalized basis, as your press release noted. So is that roughly the new normal, or is it still too early to say how it will look? To be clear, I'm not after guidance here. I'm simply trying to understand how you're thinking about it. Was the restoration driven by specific actions you took, particular measures, and will it keep improving from here? What's your view on that?

I mean, I won't give another forward-looking figure, but I think that's a solid number, and it's one we aim for. It's roughly where we stood maybe a couple of years back, before the economy and the tariffs and so on all hit us. Apart from what's already been accounted for, the tariffs and the severance, nothing else in there was unusual.

All right, my final question — I only had a quick opportunity to glance at the 10-Q, and it appears that your advertising expenses dropped quite a bit this quarter. Is that accurate? Do I have that right? Roughly from $400,000 down to $140,000? Will that affect things going forward? Was reducing your advertising expenses something you chose to do deliberately?

That likely comes down more to timing than anything else—specifically, when we run advertising, for instance as we head into the holiday season, or the timing of certain customer-related programs, I would say. So it could be that we backed a program at a customer at a different point last year compared with this year.

All right, I’ll rejoin the queue, and provided no one else is waiting, I’ll pose further questions then—but for now I’ll go back into the queue.

Great. Thank you.

Thank you so much.

Olivia, nice work on the strong quarter. I had a few questions about Groovy Girls. I believe you mentioned that you might be, that you were making efforts to get Groovy Girls listed on the Amazon website. I was just curious whether there's any progress on that effort.

Thankfully, they are up and running as of the beginning of this week.

Oh, wonderful. Congratulations.

Thank you.

I realize you attended the European Toy Show, and I was curious whether anything is happening yet with Groovy Girls sales in Europe, or is that perhaps still a process?

That revenue likely won't begin coming in until the following quarter for us, though we did display them at the Kind + Jugend Show, and the response was quite positive, so we're eager to see how that turns out.

That's great, thank you. I was curious whether you can share any update on how things are going with the warehouse. Has that process gotten underway yet?

It’s getting underway right now. During the month I spent in Asia on a sourcing trip, the group handling that effort held its first call. This is very early, and honestly there’s nothing to report at this point.

Okay, so is the company thinking there could still be some additional tariff money coming back, or do you think that's the end of it?

There's still just under $900,000 we applied for that hasn't come through to us yet. What I mean is, we remain hopeful, and word we're getting is that it will be repaid, but so far it hasn't arrived; nor have we booked it.

All right. In the current financial statement, is there any cash still owed to the company from the tariffs that isn't on the balance sheet?

Yeah, that's a little less than $900,000, but we haven't recorded it.

Yes. No, that's what I was getting at, but the funds that were supposed to be paid are now sitting on the balance sheet. Right?

What we've gotten sits on the balance sheet, and there may be roughly $20,000 sitting in receivables.

Okay.

But that's it; then there's $900,000 we haven't put into the receivable yet.

All right, that's great. I was hoping you might offer a bit of commentary on the severance. Could you perhaps let us know how many jobs were cut, or was there one particular job that was cut, or?

The job count was modest; it reflected the ongoing work tied to the reorganization we launched around this same time last year. A portion of those funds is going to be redirected toward roles in other departments. It was part of our continuing merger, where we saw that certain areas had overlapping positions, while other areas had gaps we needed to fill.

At this point, is the company considering any further ideas or actions regarding the diaper bags?

Diaper bags remain an area of focus for us. Several members of our team spent the past month in Asia, as I noted a moment ago, exploring alternative sources, and we've identified a few promising potential options that we're currently evaluating.

Is it possible that something still occurs in fiscal 2027, or would that more likely be a fiscal 2028 event?